Wall Street is stuck in a highly volatile range as investors hoping for a rally into the end of the year are browbeaten by Europe's unfolding crisis.

For months, investors have been enthusing about valuations, earnings and, more recently, signs of an improving economy. Those may be good reasons why stocks should rally, but even the most ardent are starting to sound a bit glum.

The political intrigue in southern Europe has flummoxed investors stateside. Papademos has replaced Papandreou.

Berlusconi is, well, gone -- leaving the presidential palace on Saturday secretly through a side door after his resignation as prime minister while crowds shouted clown, clown among other insults and threw coins at his limousine. When word of his departure spread, people danced in the streets and drank Champagne.

The headlines and the subsequent volatility seem relentless.

It literally just changes consistently each and every night, said Jeremy Zirin, chief U.S. equity strategist at UBS Wealth Management in New York.

Early last week, there were worries about a potential Italian default, and now we've seen government and regime change in two of the periphery nations.


Again, events in Europe over the weekend could end up shaping the start of the trading week in U.S. markets.

Italy's Senate approved a new budget law, clearing the way for approval of the package in the lower house on Saturday and the formation of an emergency government to replace that of Silvio Berlusconi. [ID:nL5E7MB10I]

On Sunday, Italy's President Giorgio Napolitano led a quick round of meetings with political party leaders at his hilltop palace to find a new prime minister and government. The talks are likely to wrap up at around noon (1700 GMT) when Napolitano is expected to ask Mario Monti, former European commissioner, to create a government made up mostly of technocrats in time for markets to start trading on Monday.

See what a beautiful day it is? Napolitano said to reporters, upon leaving his hotel to go to church and then his Senate office.

In Athens, former European Central Bank policy-maker Lucas Papademos was sworn in as Greek prime minister, replacing predecessor George Papandreou after days of political wrangling. He is tasked with meeting the terms of a bailout plan to avert bankruptcy.

The net result was that the S&P 500 ended last week with a gain of almost 1 percent after a drop of nearly 4 percent on Wednesday.

That midweek plunge came after Italy's bond yields blew out to over 7 percent, raising fears that the country, which is also the world's third-largest bond market, could go bankrupt.

But with worries that the crisis could spread to other countries, investors are looking for either the European Central Bank or EU governments to commit more capital in order to backstop sovereign bond markets.

For the markets to continue to rally, we would need to see market confidence that Italian, Spanish and French bonds are money good, Zirin said. There is likely to be more volatility around the sovereign debt crisis until we get more capital committed to the solution.


Many investors picked up put options heading into the weekend to hedge against a potential downdraft in equities next week.

Options traders exchanged about 1.48 million contracts on the Financial Select Sector SPDR fund <xlf.p> -- 3.6 times the average daily volume -- as puts outpaced calls by a factor of more than 13-to-1, according to Trade Alert.

Technical factors are taking on greater significance as the S&P 500 hovers at the top end of its trading range and traders watch for a break either up or down. When that happens, it could be swift if recent volatility is anything to go by.

Ari Wald, a technical analyst at Brown Brothers Harriman in New York, said evidence is building for a move to the downside after the index failed for a second time since late October to push above its 200-day moving average at around 1,272.

If we keep failing at this, it looks like it's confirming another lower high from the May peak, he said. This still looks like a downtrend to me.

The 200-day moving average, a closely followed level, has emerged as a key battleground for investors this year, with successive tests to the downside over the summer eventually leading to a 13 percent cascade during five fraught trading days in August.

On the downside, Wald sees support at the 50-day moving average at around 1,200. A breach of that could take the index back to around 1,100 in early 2012, he said.

But market technicians also say positive seasonalities could be in stocks' favor.


November marks the start of the six best months of the year when the Dow has booked an average gain of 7.5 percent since 1950, compared with just 0.4 percent in the other half of the year, according to the Stock Trader's Almanac.

One reason cited for that seasonal lift, at least during the last few months of the year, is holiday spending.

Investors will look for more improvement in retail sales when data for October is released on Tuesday, especially after the Thomson Reuters/University of Michigan report on Friday showed consumer sentiment rose to a five-month high in November.

This week, which is the last major week of earnings season, some prominent retailers are set to report results and give an outlook through the end of the year. They include Wal-Mart Stores <wmt.n>, often seen as a barometer of U.S. consumer spending, and youth-oriented retailer Abercrombie & Fitch <anf.n>.

My guess is we are going to have a reasonably good consumer in the year-end, said Philip Dow, director of equity strategy at RBC Wealth Management in Minneapolis. My target on the S&P is 1,380. I still think it could happen.

(Wall St Week Ahead runs every Sunday.)

(Reporting by Edward Krudy: Editing by Jan Paschal)